Services data expected to climb close to 60

Data will be released later this morning that will show just how powerful the recovery has been as the economy begins to reopen.

Markit Economics will release Purchasing Managers Indexes for both services and manufacturing. Given the 80/20 spilt between services activity and manufacturing activity, the services PMI naturally carries significantly more weight than the manufacturing number.

It is expected that both will see significant rises. The data is a measure of expansion or contraction with a read below 50 signifying contraction and above 50 expansion.

Manufacturing output which accounts for 20% of economic output is expected to have risen marginally while services, which now dominate the economy, sees an increase from 56.3 to 59.5.

While individual readings are important, analysts are more interested in the trend. Upwards momentum for services output will be difficult to maintain given any read close to or above 60 will likely see a flattening of the trend going forward as pent-up demand is satisfied.

The sense of positivity created by the continued reopening has seen optimism in the manufacturing sector climb to its strongest level since 1973. The data for March was the first time in a year that manufacturers were positive that there would be continued improvement over the next three months.

Hiring plans remain positive and this could be a significant factor for the Bank of England. Fears remain that the reopening will shine bright for a few months then fade just as quickly as economic reality sets in. With hiring plans heavily correlated with future orders particularly in heavy industry, it bodes well for a sustainable recovery.

This would mean that the Central Bank is not forced to create the dangerous precedent of taking official interest rates into negative territory.

Retail sales data is also due to be released later today. While there will be a major improvement from -3.7% to +3.5% YoY in March. However, it will be the April figure which includes the 12th of April reopening which sees the most significant increase.

The pound’s rally has consistently failed to reach the 1.40 level versus the dollar this week and yesterday, the bears were in the ascendancy with Sterling falling to a low of 1.3824, closing at 1.3838.

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Jobless claims at another Pandemic low

The recovery of the U.S. economy continues to be strong, but the housing sector is beginning to run out of steam.

Major price increases across all sectors of the market mean that potential buyers are being put off by valuations that have reached an inflection point.

Potential buyers are beginning to consider a short-term top being reached as the Administration’s stimulus pushes all asset prices higher.

There may be a small but significant cooling of prices in housing while commercial real estate continues to rally following a major slump over the period of lockdowns.

The U.S. employment market was very badly hit by the Pandemic and the initial recovery was patchy but the past two NFP headlines coupled with weekly jobless claims data are beginning to show a level of consistency that had been missing.

Weekly claims fell again to a Covid low of 547k from an upwardly revised 586K while continuing claims fell to 3674k. One other positive was that the four-week average of new claims fell below the previous figure. This indicates a trend that will also be positive for the recovery.

The growth created by the stimulus package has given a boost to all areas of the economy with hotels, airlines, and other ancillary services reporting record sales.

It is expected that this summer’s vacation season will see both record numbers and record growth, not just over last summer, which was a complete washout, but possibly in decades.

As President Biden approaches the first 100 days of his term, he has seemingly done the right thing, but his critics continue to say that he has had it easy being in a position to drive the economy rather than fight fires. His approval rating remains mired at just below what it was when he was elected.

Republican angst at what is seen as a lurch to the left is immaterial to Biden who remains committed to helping those who need it most.

The dollar index saw something of a rebound from recent lows yesterday. The market’s focus will now turn to next week’s FOMC meeting with Jerome Powell still resisting pressure to reveal the Fed’s plans to deal with, rather than simply acknowledge, rising inflation.

The index rose to a high of 91.41, closing at 91.27. Successive daily closes above 91.20 may well mean that a short-term bottom is now in place.

Lagarde paints a rosy picture

ECB President Christine Lagarde made a major effort to paint a positive picture of the Eurozone economy yesterday but stepped back from promising better times ahead just yet.

With most areas of the economy still defying leading indicators that still see improving confidence from both manufacturing and consumers, the Central Bank remains stoic in its resistance to bend to pressure.

The Bank left both official interest rates and its bond purchase programme unchanged.

Lagarde made no comment about the rumours that were circulating that the ECB would set a target for the withdrawal of PEPP by next March. In fact, she was strident in her comment that the Governing Council weren’t even considering discussing any change yet.

Lagarde acknowledged that indications are that there was some contraction of the economy in Q1 but Q2 was likely to be stronger with medium term risks more balanced.

The market appears to be aware that the amount left in the balance of PEPP would have a significant impact if used, so for now the threat of its use is sufficient. This apparently insignificant switch in attitude could be the beginning of growth in the market’s confidence that the ECB can steer the economy back to health.

The Eur 1.85 trillion that has been allocated to the PEPP was slated to be used at a far faster pace over the past month, but calmer bond markets have reduced that necessity.

Delivery and take up of the vaccination programme have improved immeasurably over the past few weeks but there are concerns amongst the scientific community that lifting of restrictions may be attempted at too fast a pace given the continued discovery of new variants.

The euro reacted to a stronger dollar by falling back to test support at 1.20 yesterday. It reached a low of 1.1993, rallied to close at 1.2015.